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The One-Week Pre-earnings Momentum Trade in NVIDIA

NVIDIA Corporation (NASDAQ:NVDA) : The One-Week Pre-earnings Momentum Trade With Options

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The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

We just looked at Nvidia through the other lens -- one that doesn't look for bullish or directional momentum, but rather looks for volatility, in the dossier The Earnings Option Trade in NVIDIA Corporation Nobody Is Talking About.

Now we will look at a different type of trade -- one that shows a larger average win, but also a larger average loss and takes a much riskier position on stock direction. These two back-tests can be seen as counter balances -- alternatives based on the type of trade analysis that fits our belief systems.

There is a bullish momentum pattern in NVIDIA Corporation (NASDAQ:NVDA) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market. This is exactly what we saw with Microsoft last week and what we discussed in the dossier Trading Pre-earnings Momentum in Microsoft.

The strategy won't work forever, but for now it is a momentum play that has not only returned 1352.4%, but has also shown a win-rate of 92%.

Nvidia's next earnings date has not been confirmed, so for now we are loosely working on the estimate from Wall Street Horizon, which is 11-09-2017. The actual date will be confirmed soon by Nvidia.

The logic behind the option trading backtest is easy to understand -- in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date. Now we can see it in NVIDIA Corporation.

The Bullish Option Trade Before Earnings in NVIDIA Corporation
We will examine the outcome of getting long a weekly call option in NVIDIA Corporation 7-days before earnings (using calendar days) and selling the call before the earnings announcement.

Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:

In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.

Here are the results over the last three-years in NVIDIA Corporation:

NVDA: Long 40 Delta Call

% Wins: 92%
Wins: 11 Losses: 1
% Return:  1352.4% 

Tap Here to See the Back-test

The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).

We see a 1352.4% return, testing this over the last 12 earnings dates in NVIDIA Corporation. That's a total of just 84 days (7-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.

We can also see that this strategy hasn't been a winner all the time, rather it has won 11 times and lost 1 times, for a 92% win-rate and again, that 1352.4% return in less than six-full months of trading.

Setting Expectations
While this strategy had an overall return of 1352.4%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 47.28% over the six-day period.

Back-testing More Time Periods in NVIDIA Corporation
Now we can look at just the last year as well:

NVDA: Long 40 Delta Call

% Wins: 92%
Wins: 3 Losses: 1
% Return:  130.3% 

Tap Here to See the Back-test

We're now looking at 130.3% returns, on 3 winning trades and 1 losing trades. It's worth noting again that we are only talking about one-week of trading for each earnings release, so this is 130.3% in just 4-weeks of total trading.
      The average percent return over the last year per trade was 27.74%.

Bull markets tend to create optimism, whether it's deserved or not. To see how to test this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.

Past performance is not an indication of future results.

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.